Saturday, January 8, 2011

Debt relief = Taxable Income

Have you negotiated with a creditor to pay less than you owe on a debt such as a credit card? The IRS considers forgiven or canceled debt as taxable income.

You hear the commercials all the time: Companies that negotiate on behalf of consumers with debt collectors to pay off a portion of their outstanding debts. Several months later, these consumers receive a Form 1099-C. Creditors who accept at least $600 less than the original balance are required by law to issue this form to the debtor and the IRS.

If you're negotiating with a collector to settle a debt, clarify if a Form 1099-C will be issued and the exact amount that will be reported to the IRS. Make sure you bring the Form 1099-C along with W-2s and other forms when you visit your tax preparer. If the 1099-C is incorrect, contact the debt collector immediately and ask for a corrected 1099-C form.

In most cases, Form 1099-C is reported on line 21 of the Form 1040 long form and is included as ordinary income.

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